Iraq Fails to Entice Bidders for Most Oil, Gas Blocks

May 31 (Bloomberg) -- Iraq failed to attract partners for
most of the 12 oil and natural-gas exploration licenses offered
in a two-day auction at which Asian and Russian bidders were
more prominent than Western companies.

The Oil Ministry awarded three blocks, two for oil and one
for gas, at the auction ceremony in Baghdad. Russia’s OAO Lukoil
and Inpex Corp. of Japan won a joint bid to explore for crude in
southern Iraq, and Pakistan Petroleum Ltd. won rights to an
eastern gas block, Abdul Mahdy Al-Ameedi, the head of the
ministry’s licensing department, said today. Kuwait Energy Co.
led a group awarded rights to an oil area yesterday.

The licensing comes amid an energy-industry revival that
has boosted Iraq into third place among the 12 members of the
Organization of Petroleum Exporting Countries, nine years after
the U.S.-led invasion that toppled Saddam Hussein. In its three
previous bid rounds since 2003, Iraq auctioned rights to produce
at oil fields already discovered or in operation, whereas this
week’s was for new exploration.

“Bids were won by companies that are already in Iraq,”
Stuart Walley, regional manager for consultant Senergy Oil and
Gas, said by telephone from Dubai today. “In some cases their
existing knowledge could have helped in assessing the potential,
prospectively, of oil and gas in the auctioned blocks.”

Lukoil Wins Block

Lukoil is the operator of West Qurna-2 oil development,
Inpex was part of a Japanese group seeking to build a refinery
and produce crude at the Nassiriya field, and Kuwait Energy won
rights to develop gas fields in a previous Iraqi bid round.

In this week’s bidding, some international companies proved
reluctant to commit to costly exploration projects in return for
the per-barrel fee they would receive under the service
contracts on offer. Iraq holds the world’s fifth-largest crude
reserves, according to data from BP Plc that include Canadian
oil sands.

The only Western-based company to bid in the round was
London-listed Premier Oil Plc, which took part in two
unsuccessful offers.

Lukoil and Inpex bid a fee of $5.99 per barrel for oil
block 10, beating offers from two groups led by Petrovietnam Oil
and Gas Group and Kuwait Energy. Pakistan Petroleum Ltd. won
rights to area 8, the only gas area awarded, for a fee
equivalent to $5.38 a barrel, outbidding a joint offer from
Japan’s Japex Corp. and Itochu Corp.

Fees Low?

“The remuneration fees seemed low,” said Walley of
Senergy, which advised a company that qualified to bid in the
auction. “From an economics perspective, it’s difficult to see
how some bids can work. That said, conditions will differ from
block to block and upon the rate at which any potential
discovery can be moved through to development,” so some areas
could be less costly, said Walley, who declined to name
Senergy’s client.

Kuwait Energy and its partners, Dubai-based Dragon Oil Plc
and Turkiye Petrolleri AO, made the only offer to search for
crude in block 9 along the Iranian border, bidding $6.24 a
barrel.

The Oil Ministry rejected an offer by a Petrovietnam-led
group for one oil field because the fee exceeded the maximum the
government was willing to pay.

Iraq offered five exploration areas for crude and seven for
gas during this week’s auction, its fourth licensing round, in
which 47 companies from 25 countries were qualified to
participate.

Gas Priority

The ministry is seeking to develop gas as fuel for power
plants, which meet less than half of domestic electricity needs.

“Of course, we will prepare for a fifth round, and we have
more than 60 blocks ready for bidding,” Oil Minister Abdul
Kareem al-Luaibi told reporters after today’s auction. “We will
start, God willing, during the next months to prepare the data
packages,” he said.

Al-Ameedi, director general of the licensing department,
said it was “unfortunate” that the three exploration blocks in
western Anbar province attracted no bids.

In an earlier round in June 2009, the ministry awarded only
one of eight areas on offer for redevelopment, assigning rights
to the Rumaila field, the country’s largest, to BP. It
negotiated contracts later for the seven unawarded fields.

“Expectations were low going into this as the terms were
so fundamentally unsuitable, but I am slightly surprised by how
bad the turnout was,” Samuel Ciszuk, a consultant at KBC Energy
Economics in Walton-on-Thames, U.K., said yesterday.

Kurdish Agreements

Unlike the central government, authorities in Iraq’s self-ruled Kurdish region have wooed at least a dozen international
energy companies by offering production-sharing agreements,
which compensate investors with a share of any output. Iraq has
refused to recognize such arrangements and barred Exxon Mobil
Corp. from participating in this week’s auction because the U.S.
company agreed to do business in the northern Kurdish area.

The government in Baghdad is at an impasse with Kurdish
authorities over how to divide up revenue from sales of Kurdish
oil. The Kurds halted shipments on April 1 through a pipeline
controlled by the central government. Thamir Ghadhban, an Iraqi
government adviser and former oil minister, said May 4 in
Istanbul that he was “confident” the dispute would be settled
by the end of the year.

Iraq is exporting 2.45 million barrels a day of crude, a
level that’s “higher than planned,” Luaibi, the oil minister,
said today.

Production has rebounded since Hussein’s defeat and removal
in 2003 ended decades of stagnation from wars and sanctions. The
Persian Gulf state is now pumping more than 3 million barrels a
day, according to OPEC data, and is on track to surpass Iran as
the group’s No. 2 producer within months.

Iraq’s output will rise further in July, partly because of
a planned increase at the Halfaya oil field in southeastern al-Amara province, Luaibi said.